By: Andrew J. Hoffman, Attorney
If you are reading this article, then you have at least considered the possibility that you may need to graduate your estate plan from the basic Last Will and Testament to a Revocable Living Trust.
A lot of people have a hard time conceptualizing what a Revocable Living Trust is. A Revocable Living Trust is like a 5-gallon bucket. Instead of water, it is a place to put your assets. The Trustor, to use the analogy, grabs the handle of their 5-gallon bucket, and then places their real estate, equipment, cows, and any other assets, into the 5-gallon bucket. Those assets travel into the 5 gallon bucket using tools like a deed, a bill of sale, or other similar transfer devices. Then, upon the Trustor’s death (you), the successor Trustee simply grabs a hold of the bucket handle, reaches into the bucket and then distributes the assets using the same types of transfer instruments that were used to put the assets into the bucket in the first place (i.e., deed, bill of sale, and so forth).
Often, when we prepare traditional estate plans for farm and ranch couples, we begin the process by preparing two individual Revocable Living Trusts. A trust for the husband and one for the wife. After we have prepared the his and hers trusts, we then discuss “funding” each trust. The funding stage, is where we “put things” into the bucket. Frequently, when reviewing a client’s estate plan, we run across trusts that have not been appropriately funded, that is assets have not been transferred into the bucket, or in the alternative, assets have been put into the wrong bucket.
In determining what goes into a husband’s trust or wife’s trust, we take a very pragmatic approach. We review each asset individually, and then discuss that asset on a case-by-case basis.
For example, lets assume that Farmer Godfrey is like many rural Nebraskans, and owns a quarter of real estate, 50 head of cattle, and a nice solid line of farm and ranch equipment. Farmer Godfrey is 75 years old and is still actively engaged in the operation. His wife Jane, occasionally hauls grain in the fall, but is otherwise toiling in the kitchen.
When Farmer Godfrey comes into our office, figuratively speaking, there are a few realities that we face during our discussions. First and foremost, according to the Nebraska Department of Health and Human Services statistical database, the average length of life for a male in Nebraska is 71 years old and the average length of life for a female in Nebraska is 77 years old. Thus, statistically speaking, we know that Farmer Godfrey is likely going to die first, thus leaving his assets to his lovely wife.
Setting aside for a moment those grim details about who dies first in a marriage, we know that pursuant to §1014 of the Internal Revenue Code that beneficiaries of an asset receive what is called a step-up in basis. Therefore, if Farmer Godfrey dies with farm and ranch equipment and cattle in his name, which have been fully depreciated, and he leaves those to his lovely wife, that his lovely wife will be able to “inherit” those assets and receive a full step-up in basis. Thus, assets that would have cost Farmer Godfrey an arm and a leg in income taxes to sell, his wife will be able to sell those assets after his death, tax free.
Based upon real world experiences, on a number of occasions I have assisted widows in having a farm and/or ranch sale or cattle disbursement sale, after the passing of their husband. Often times when a husband dies first, a farm and ranch wife does decide to sell assets. Of course, there are exceptions to this rule, and I am certainly not one to categorize or stereotype farm and ranch wives. There are a number of farm and ranch wives that “keep on keeping on” after the loss of their husband. However, on enough occasions, we see a spouse actually selling out. Knowing that, we try to set up estate plans so that a surviving spouse (wife), can have a tax-free cattle disbursement sale and farm and equipment sale, if those are the facts presented to us.
If Farmer Godfrey owns the equipment and the cattle in his name, then those assets will have to be transferred to his wife, in order for her to receive the step-up in basis. The manner in which assets are transferred to a beneficiary, in this case his wife, at death, can vary. For assets like cattle and farm equipment, essentially, those assets either have to be probated (with Farmer Godfrey’s will) or passed down through a Revocable Living Trust (without a will and without probate). As most people know, probate is the judicial process used to retitle assets. This can be wildly expensive. Minimally, Farmer Godfrey’s wife, can expect to pay well in excess of $10,000.00 in probate fees to transfer his farm and ranch equipment to the surviving spouse. This can be an unfortunate event, for a surviving farm wife.
The alternative, and the approach that we recommend to our clients, is to transfer all of the cattle and equipment into Farmer Godfrey’s trust. By having the farm equipment and cattle in Farmer Godfrey’s “bucket”, upon his death, the surviving wife takes over as Trustee, and simply transfers those assets to her trust through a series of transfer documents. Through this method, she avoids probate, while at the same time receiving a step-up in basis in those vital assets. While this estate plan is not for everybody, it certainly fits a fair number of families in out state Nebraska farm country.
Importantly, it may not just be farm and ranch assets. It may be other types of business assets at play. Regardless of the situation, we will review each estate plan on a case-by-case basis, and make recommendations based upon the circumstances.
If you would like to learn more, please attend one of our free upcoming Estate Planning Workshops. Otherwise please consider a free, no hassle, consultation regarding an estate plan, at any one of our three locations in Atkinson, O’Neill or Central City.